Is China about to punk Trump on trade?
What's a self-imagined dealmaker extraordinaire to do when there's no good deal to be had?
This is the quandary facing America's dealmaker-in-chief, Donald Trump. He's dispatched a high-level U.S. trade delegation — it includes Treasury Secretary Steven Mnuchin and National Economic Council Director Larry Kudlow — to Beijing to avert a trade war with China. But when that group returns to Washington after this week's talks with their Chinese counterparts, they almost certainly won't have struck any sort of meaningful agreement, or even have assembled the outline of one.
The reason is simple: No good deal is truly possible amid America and China's escalating competition to be the technological leader and thus leading economic and military superpower of the 21st century. So what will Trump do?
The U.S. simply cannot tolerate China — an economic, military, and ideological rival — breaking international trade rules as it tries to take the lead in emerging technologies and industries such as artificial intelligence and robotics. But that is the path China has chosen to get rich and powerful. As my AEI colleague Derek Scissors has noted, "Subsidies-driven industrial policy and theft of U.S. technology have been cornerstones of Chinese economic strategy since 'opening up' began in 1979."
Now, the smart way to make China play fair is not through broad tariffs, but by narrowly and directly targeting and sanctioning the companies benefiting from government subsidies and intellectual property theft. Such firms might, for instance, be banned from accessing U.S. capital markets. Of course, this would invite Chinese retaliation against U.S. companies.
But the Trump administration — and future administrations — must be prepared to play the long game against Beijing, which surely doubts the endurance of liberal democracies like ours. At the same time, the U.S. needs to implement a pro-innovation agenda, including more federal science investment and increased high-skill immigration, to keep the economy at the technological frontier.
If your eyes are glazing over, imagine how President Trump must feel when prodded to think about complex and substantive aspects of international trade. Where's the high-stakes drama that the former reality show star loves so much? The attention-challenged president hasn't really shown himself to be a patient thinker and strategist. And so, sadly, it seems more likely that Trump will just opt for an escalation in tariffs leading to a true trade war with China — one that would run afoul and undermine the WTO and current global trading system — rather than employ a smarter strategy of steady pressure.
Trump doesn't seem to understand the true nature of the U.S.-China conflict. As he tweeted on Tuesday, "Delegation heading to China to begin talks on the Massive Trade Deficit that has been created with our Country." Of course, as numerous economists have explained, including to Trump directly, America's trade deficit with China, Europe, and Mexico isn't because of bad trade deals. It's because of macroeconomic factors, specifically America's level of savings and investment. America needs to save more and spend less if it wants an overall lower trade deficit with the rest of the world.
Indeed, America's fiscal stimulus and rising budget deficits are only going to make trade deficits wider. To reduce the $375 billion deficit by the $100 billion that Trump has called for is probably impossible without some national accounting sleight of hand, such as China buying $100 billion worth of U.S. oil or gas and then reselling it back on the open market. In addition, China could make more U.S. high-tech purchases and investments, both of which Washington is already making more difficult for supposed national security reasons.
Then there's the politics of trade. Trump made it his core campaign issue, rivaled only by immigration. He needs results, especially at a time when trade deficit numbers are likely to worsen. So at day's end, Trump might opt for the optics of a deal, any deal, rather than implementing a substantive strategy that takes time to pay off. Beijing has already floated some relatively minor concessions — such as a promise to open up the Chinese financial sector further — that could form the basis of a quickie agreement that allows Trump to claim victory and move on.
This just happened with U.S. trade negotiations with South Korea. Trump heralded the revised agreement as a "great deal for American and Korean workers," even though Korea's concessions were mostly symbolic tweaks. The same play with China would be a missed opportunity to confront one of America's great economic challenges — which would be a terrible deal for America.